Was IV Really Up? Nope
Today, on a day when the SPX was down more than 30 handles the VIX was up just a little more than 1%. What gives?
The IV was actually down on a strike to strike basis. Take a look at the IV of Yesterday's ATM and Today's ATM. Yesterdays ATM strike the 1290's closed the day with an implied volatility of 20% today. Yesterday, that IV was 21.76%. The 1250's (today's defacto ATM) had a volatility of about 25.3% yesterday; today that same strike had an IV of 24.5. The lower one goes down the curve, the more one sees that strike IV was much lower today than it was yesterday. Especially, given the fact that we had a drop of more than 30 handles. Upon further review one can see that the market was selling somewhat aggressively into this down turn:
So why are they selling? I can think of two reasons:
1. IV was too high as the market feared that no deal would be signed. Yes, we sold off more than 50 points over the last 3 days. If no deal would have been signed you can easily double today's number. With uncertainty out of the market IV comes in
2. The market was 'catching up' to capitulating with the VIX. The VIX was already high enough to signal a capitulation, the market only needed to catch up to the VIX. One could argue that today, that happened.
The one interesting thing that developed today, that should be troubling though is this: VIX futures were buying this sell off. While premium sellers in SPX were abundant, Future IV buyers were everywhere in VIX futures.
Although, one could argue that relative to VIX yesterday, the futures were artificially low. I would view today as a return to normal. As fear of an event builds the futures and VIX itself will disassociate. Now that we aren’t waiting on a specific event, I would be shocked if August did not correlate at a level of about .6 to .65 of VIX cash (we are getting close t o expiration). The last time the market didn’t buy a sell off, but the VIX futures did, we did bounce back, but then quickly turned around again. I would not be shocked if the same thing happened
So what now? I think one could argue there has not been a better time in the recent past to sell a time spreads in the ES than right now. IV is high, the market is moving, that is perfect for a time spread. This is a great trade that many of my 'pro' traders are playing with in one form or another right now. I like selling put spreads as a second option or for those that do not have futures accounts. I would also point out that there are some individual names with very cheap IV’s, in relative terms, that might be worth playing with as well.
We are at a key technical level here. The market has been able to hold 1250, the last 3 times we hit it. If it doesn’t this time, I will be officially buying a major correction (which would put us closer to 1150 than 1200.
